Corporate Governance Lectures 1

Definition continued• 3.Corporate governance involves the determination of

minimum obligations of an organisation toward various stakeholders (Jerry et al,1997).

• 4. Corporate governance means leadership sustainability and corporate citizenship(King 111,2009).

• 5.Corporate governance involves a set of relationships between company management ,its board , its shareholders and stakeholders (OECD ,1992).

• 6. Corporate governance is concerned about ethical principles, values, practices, that facilitate ,holding the balance between economic and social goals, between an individual and communal goals. The aim is to align as nearly as possible the interests of the individual, and the cooperation of society within the framework of sound corporate governance (African Union).

Objectives of corporate governance

i) That a properly structured Board capable of taking independent and objective

decisions is in place at the helm of affairs;

Objectives (cont).

ii) That the Board is balanced as regards the representation of adequate number of

non-executive and independent directors who will take care of the interests and

well being of all the stakeholders;

objectives

iii) That the Board adopts transparent procedures and practices and arrives at

decisions on the strength of adequate information.(iv) That the Board has an effective machinery to subserve the

concerns ofstakeholders;

objectives

(v) That the Board keeps the shareholders informed of relevant developments

impacting the company;

objectives

(vii) That the Board remains in effective control of the affairs of the company at all

times.The overall endeavour of the Board should be to take the

organisation forward, tomaximise long-term value and shareholders’ wealth.”

Key issues in corporate governance

1.Financial reporting and auditing.2.Director’s remuneration.3.Decision making powers.

Key issues (cont).

4.Risk taking.5.Communication between the directors and shareholders.

APPROACHESTHE SHAREHOLDER VALUE APPROACH

• It is a management philosophy that regards maximisation of shareholder’s equity as its highest objective. It attempts to increase this value by following policies that :

• 1. enhance the firm’s earnings,• 2. increase the market value of its

shares, and • 3. increase the amount or frequency

of the dividend paid .

Stakeholder value approach

• It is a management philosophy that regards maximisation of the interests of all stakeholders and the community as its highest objective. It follows policies that:

• 1.minimise cost and waste while improving the quality of its products.

• 2.enhance the skills and satisfaction of its employees, and • 3.contribute to the development of the community from

which it draws its resources and sustenance.

The enlightened shareholder approach

• This is a philosophy based on the premises that the directors of a company must pursue the interests of the shareholders in an enlightened and inclusive way. The directors should look to the long term and not just to the short term. Managers should have regard for the interests of other stakeholders in the company. Managers should be aware of the need to create and maintain product relationships with a range of stakeholders.

Stakeholders in corporate governance

• 1. Stakeholder Definition: A stakeholder is anybody who can affect or is affected by an organisation, strategy or project. They can be internal or external. 2.Stakeholder may refer to: Stakeholder (corporate), an accountant, group, organization, member or system who affects or can be affected by an organization's operations, activities or behaviuor.

Stakeholders (cont).

• Internal stakeholders: Individuals who reside inside the company as board members, executives, managers, employees, and trade unions .

• External stakeholders include shareholders or stockholders as well as governmental bodies, communities, financiers.

INTERNAL STAKEHOLDERSstakeholder Main role Claims and interests

Directors Responsible for the actions of the corporation Directors control company in best interest of stakeholders.

PayPerformance linked bonusesShare optionsStatusReputationPower

Company secretary Ensure compliance with company legislation and regulation and keep board members informed of their legal responsibilities . Advise board on corporate governance matters

PayPerformance linked bonusesJob stabilityCareer progressionStatusWorking conditions

Stakeholders (cont).stakeholder Main role Claims and interests

Sub-board management Run business operationsImplement board policies


Employees Carry out orders of management


Employee representatives e.g. Trade unions

Protect employ interests ,--.

PowerStatus

External stakeholdersstakeholder Main role Claims and

interestsAuditors Independent review

of company's reported financial position

FeesReputationQuality of relationshipCompliance with audit requirements

Regulators Implementation and monitoring of regulation

Compliance with regulationsEffectiveness of regulations

Government Set and maintain laws with which all companies must comply

Compliance with lawsPayment of taxesLevel of employment

External stakeholders (cont).stakeholder Main role Interests and claims

Stock Exchange Set and maintain rules and regulations for companies listed on the exchange

Compliance with rules and regulationsFees

Small investors None – limited power Maximisation of shareholder value

Boards ????EXAMPLES PRIVATE SECTOR PUBLIC SECOR NGO-SECTOR

X Profit making Non commercial Non-profit

X Industries, firms, IBM, CocaCola, Barclays Bank, Delta Corporation

Parastatals, ZESA, GMB,NSSA,ZBC ,PSIMAS,ZIMRA,All universities.

Care , World Vision ,Msasa Project, Connect

Structure and size Boards appointed by shareholders.

Boards appointed by government ministers

Boards appointed by members at a meeting.

X Composed of external and internal boards of directors.

Composed of internal and external board members.

Composed of trustees or governors

Size, composition 9-12 members, board divided into committees .

7-10 members, board divided into committees

5-8 members, board divided into committees .

Boards ???

Roles and duties Total control and authority over organisation’s mission and purpose. Overseeing the management of resources.

Controls the organisation’s activities. Determine organisation’s mission ,VISION, manage resources,Supervise CEO.

Duty of loyalty, duty of care, attend meetings, read board papers.

Accountability To the shareholders and other stakeholders such as, customers, creditors,banks,suppliiers.

To the minister and the public at large, tax payers, civic, interest groups .

To stakeholders

BOARDS ???

Sources of funding Shareholders, both individual and institutional ,other investors

Government ministers through Parliamentary votes and tax payers money.

Donor agencies, fundraising from well wishers .

History of corporate governance in UK

• In the UK, corporate governance has developed over a number of codes that have been enforced by the stock exchange.

• The Cadbury Report (Financial Aspects of Corporate Governance)

• Issued in 1992 - contained a Code of Best Practice for various aspects of corporate governance.

• The Greenbury Report (Study Group on Director’s Remuneration)

• Issued in 1995 - contained a Code of Best Practice for determining and accounting for directors’ remuneration.

HISTORY OF CORPORATE GOVERNANCE (cont).

• The Hampel Report• Issued in 1998 - to counter the rise in 'checklist' style

reporting, report contained a list of principles of good corporate governance to be applied.

• The Combined Code on Corporate Governance (Combined Code)

• Final version issued in 1998 (revised and reissued in 2003) - incorporates all recommendations of the Cadbury, Greenbury and Hampel Report and has been incorporated into the Listing Rules that listed companies have to follow.

• Other developments:

History (cont).

• Other developments:• The Higgs Report: Review of the role and effectiveness of

non-executive directors (Higgs Report) and Audit Committees: Combined Code Guidance (Smith Report)

• Published in 2003 - contained best practice guidance relating to non-executive directors and audit committees respectively. While companies may find it helpful, this guidance has no formal status and companies are not required to follow it when applying the Combined Code. However, some elements of these two reports were included in the revised version of the Combined Code, published in 2003.

•

History( cont).

• Internal Control : Guidance for Directors on the Combined Code (Turnbull Report)

• Issued in 2003 - provides guidance to companies on how to apply the section of the Combined Code dealing with internal control

Challenges to weak corporate governance reforms in Zimbabwe:

• Challenges to weak corporate governance reforms in Zimbabwe:

• Weak, inefficient and inadequate legal and regulatory framework for enforcing rules and laws politicians do not obey the laws. They are untouchables, and above the law.

• Institutionalised corruption.• Politicians shielding law-breakers.• A culture of political patronage.


• Widespread poverty, high unemployment does not create an environment in which business in conducted transparently. Issues of accountability and ethics are easy to ignore. Professionalism is not encouraged. Those who blow the whistle are victimised and not protected.

• Collapse of moral values. Zimbabwe is a religious society. The pastors have turned religious institutions into havens of corruption


• Education system failing to inculcate moral values in the youth. The education system has its own challenges hence it cannot teach moral values of honesty, integrity, and rectitude in young people. Infact, students lean the concept of corruption in schools.

Challenges to weak corporate governance reforms in Zimbabwe

• Promotion of gender issues. The doctrine of gender, equality between men and women has created unnecessary competition between men and women. The competition has resulted in the breakdown of the moral fabric in society. Women are no longer interested in teaching their children the virtues of being honesty, truthful, kind, reliable and considerate. Instead, they see men as their enemies.

Company lawyer-duties

• Research

• Identify and discuss any 5 duties of the company lawyer in corporate governance.

• END

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Corporate Governance Lectures 1